As the GST Council meets on November 3-4, both the Centre and states seem to have hardened their positions with respect to the issues they disagree on.

Defending the idea of using cess proceeds for states’ compensation rather than a higher demerit GST rate, the Centre pointed out that of every 100 rupees collected via the latter option, only 29 rupees remain with it, which makes the tax burden on businesses and consumers abnormally high.

As the GST Council meets here on November 3-4, both the Centre and states seem to have hardened their positions with respect to the issues they disagree on. And they are reaching out to independent experts and the media to buttress their arguments.

While West Bengal finance minister Amit Mitra presented incontrovertible data to counter the number floated by the Centre of 11 lakh service tax assessees — the actual number is over 30 lakh — and forced a review of some agreements reached earlier on the sharing of administrative powers on indirect tax assessees during the goods and services tax (GST) regime, Kerala finance minister Thomas Isaac recently wrote in The Indian Express strongly opposing the plan to impose a cess on select demerit goods to raise the funds for compensating states in the GST regime. “The logic of reducing the tax incidence on consumer durables and demerit goods to 26% makes the GST severely regressive… The upper rate has been pegged at a lower rate so that the central government has the option to impose the cess as and when necessary,” Isaac noted, and batted for the demerit rate of 40% (on a much lesser number of items) recommended by the chief economic adviser Arvind Subramanian.

Also, there is a raging debate on the Centre’s proposal for having multiple rates for GST. In a blog post, finance minister Arun Jaitley last week defended the multiple-rate structure citing its inevitability in the present Indian context. He said that “different items used by different segments of society have to be taxed differently”. While the minister cited the example of European Union countries where the comparable value-added tax structure comprises many rates, experts point out that in most other GST/VAT countries, the single-rate system is followed and even others are converging towards this principle.

Montek Singh Ahluwalia, who was deputy chairman of the now-disbanded Planning Commission and a prominent policymaker for decades, wrote in Mint: “The proposal before the council departs significantly from what experts regard as an the ideal GST: One with a single rate with very few exemptions.” Stating that a lower rate for some goods necessitates much higher rates for others, which encourages tax evasion, he said: “About 50 countries, including many developing countries, have switched to some form of value-added taxation in the past two decades and 80% of them have introduced only one rate, with some having two or more. The European Union has multiple rates, but they have recently released a Green Paper for discussion on how to converge to a single rate.”

Defending the idea of using cess proceeds for states’ compensation rather than a higher demerit GST rate, the Centre pointed out that of every 100 rupees collected via the latter option, only 29 rupees remain with it, which makes the tax burden on businesses and consumers abnormally high. The cess mooted by the Centre is meant to apply on items currently being taxed at rates higher than the highest proposed slab of 26% and will be equal to the difference between the current tax incidence on these items and 26%. Official sources said the government has estimated the revenue shortfall given the multiple rate structure and the cess proposed, to around R50,000 crore. Independent experts, however, say that the exemptions (about 100) and the rates (4% for gold, 6%, 12%, 18%) proposed and the bases assumed have taken the revenue neutral rate to 18% or thereabouts, compared with 15-15.5% suggested by the CEA.

If the Centre’s proposal is endorsed by the council, a quarter of the total indirect tax base would be under the highest rate of 26%. Although around 35% of items are currently taxed at 27% or above — with 12.5% excise and 14.5% state VAT — when it comes to the tax base, they constitute much less. Isaac had told FE: “Now the VAT rate (on merit goods) is 5% and this is proposed to be raised to 6%, why all the consumer durables, which suffer a tax rate of anything above 30-48% now, would come under a lower rate of 26%. This cannot be accepted. The 26% rate would have to go up significantly, and the 6% rate ought to be reduced to 5%.”

On the issue of dividing the administrative powers between the Centre and states, an earlier agreement was that states will have exclusive control on taxpayers with annual turnover up to R1.5 crore (while all service tax assessees, irrespective of turnover will remain with the Centre) and taxpayers above the threshold will be shared between the two authorities, sticking to the one-authority-one-taxpayer principle principle. However, the data subsequently emerged on service tax assessee base upset the formula. States contend that the Centre would gain if the earlier plan was implemented and this issue is likely to hog the limelight in the council’s Thursday meeting.

In the GST excise duty, state VAT (along with countervailing taxes on imports), service tax, octroi, entry tax and sundry cesses levied by the Centre and states will be subsumed. States had said that by keeping the existing clean energy cess and a cess on tobacco, bulk of the funds for compensating states for any revenue loss in the GST regime could be found while other cesses are subsumed in GST.

This refers to the statement of Montek Sigh that "a lower rate for some goods necessitates much higher rates for others, which encourages tax evasion". Higher rate(s) is not the reason for tax evasion. For instance, gold is presently taxed at a very low rate; still tax-evasion is rampant on this item.

Reply

Niraj Srivastwa

Nov 3, 2016 at 2:33 am

what one can expect from government led by feku, totally useless and bogus government don't have any idea of micro economics and macro economics

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Olde Phart

Nov 3, 2016 at 1:58 am

Just camouflage route to increase tax. Income tax 30% plus GST 26%, the govt gets more than half your money. How can Indian economy grow with no surplus in hands of the people? The govt folks get tax free ries and subsidies for other commodities. Tax them also!

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Pahari Bhai

Nov 3, 2016 at 3:05 am

No one has so far noticed the huge revenue which the central government will gain from the goods manufactured in exempted areas like J&K, North East, Himachal Pradesh & Uttarakhand. At present there is no excise duty on these items so the Central government loose only the duty which is collected at the factory price of these goods and not on the actual price on which such goods are actually sold. However under GST the Central Government will earn huge revenue except the tax imposed at the time of clearance from factory. Thereafter the central government will earn revenue on each value addition. Apart from above except some items under MRP provisions the central government gets excise duty only on transaction value at the time clearance from factory and not on the price at which goods are sold to the ultimate customer but in GST Central will get revenue at each stage and it will be almost equivalent to total VAT revenue of all state governments. It is also surprising that when Mr. Jaitley say that HAWAI CHAPPAL AND AIR CONDITIONER cannot be taxed at same rate then why he forget the GOLD which he proposed to be taxed at 4 percent. LASTLY when the CHEWING TOBACCO used by the poor people can be described as SIN GOODS and taxed @ 40% then WHY PACKAGED FOOD items (like 35 gms. chips packet of Rs.10), MOBILE PHONES costing more then Rs.10000/=, COSTLY PENS, WATCHES, GOLD OR DIAMOND JEWELLERY are also not categorised as SIN goods and taxed @ 40%. Similarly bed cooking oils selling @ 150 per litre, BASMATI RICE selling at > 200 per kg etc. should not be exempted and taxed at 18 % or higher.

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S

S.Parker

Nov 3, 2016 at 2:39 am

Neither the Center nor States are bothered to take the public [ the common man who is paying the tax ] opinion on tax rates for GST. If the politicians decide over such issues advised by experts who have their base in foreign countries then no benificial decision to the comman man can be taken and the GST will become a burden on the comman man.